Problem Set 1

As a reminder, you are allowed and encouraged to do this problem set with others. However, each student must submit his or her own problem set, which may not be a direct copy of another student's.

Section 1: Multiple Choice.

Question 1 What does GDP measure?

a. A nation's population.
b. A nation's geographic area.
c. A nation's standard of living.
d. A nation's income.

Question 2 Which of the following applies to measurement of PPP GDP per capita in poor countries?

a. It is typically produced using both the income and expenditure methods, then cross-verified.
b. The PPP correction is done using a country-specific basket of goods, to account for variation in local tastes.
c. Different sources produced at different times yield comparable estimates.
d. Reported GDP numbers include estimates of the production done in the informal sector of the economy.

Question 3 Economists have taken a broader view on welfare, adding other factors to their measures besides just PPP GDP per capita. Which of the following is a main lesson from doing so?

a. Poor countries invest much more of their GDP; accounting for this lowers their welfare dramatically.
b. Welfare gaps between poor and rich countries are smaller than PPP GDP per capita gaps would seem to suggest.
c. Citizens of poor countries enjoy much more leisure than citizens of rich countries, which tends to offset their low measured incomes.
d. The low life expectancies in short countries dramatically lower their welfare.

Question 4 What is the main lesson of the PPP correction to GDP per capita?

a. Market exchange rates make poor countries look too poor and rich countries too rich.
b. PPP exchange rates fluctuate too much on a daily basis to be of any real use.
c. It is easier to measure prices across countries than market exchange rates.
d. PPP exchange rates produces roughly the same results as the easier-to-implement exchange rate method.

Question 5 How large are the differences in PPP GDP per capita between Western Europe and similar countries (U.S., Australia, Japan, etc.) versus sub-Saharan Africa?

a. Western Europe is roughly twice as rich.
b. Western Europe is roughly five times as rich.
c. Western Europe is roughly ten times as rich.
d. Western Europe is roughly forty times as rich.

Question 6 Why do economists conduct tests of unconditional convergence?

a. To test whether poor countries are catching up to richer ones in terms of PPP GDP per capita.
b. To prove the Solow model right.
c. To test whether the Solow model is right.
d. To test whether savings rate and population growth policies matter for development.

Question 7 Early foreign aid policy focused mostly on capital. What drawback of capital-oriented policy did it fail to account for?

a. Capital depreciates.
b. Production of new capital requires saving and investment today.
c. The population grows over time.
d. There are diminishing returns to capital.

Question 8 Suppose that a country increases its savings rate. How will this affect its income and income growth rate in the Solow model?

a. It raises income by raising the short run and long run growth rates.
b. It raises income by raising the short run but not the long run growth rate.
c. It leaves income and long run growth rates unchanged but raises the short run growth rate.
d. It does not affect any of the three.

Question 9 Suppose that a natural disaster destroys half of a country's capital stock, but takes no lives. Looking at the years after the disaster strikes, how will this affect the country's income and income growth rate in the Solow model?

a. It will raise short-run growth rates and return income to its former level.
b. It will leave short-run growth rates unaffected and income permanently lower.
c. It will lower short-run growth rates and leave income permanently lower.
d. It will raise long-run growth rates and boost income to a permanently higher level.

Question 10 What does the word randomized in RCT stand for?

a. Researchers randomly select the hypothesis to test.
b. Researchers randomly select the duration of the project.
c. Participants are chosen randomly and forced to participate in the trial.
d. Participants are randomly allocated to the control or treatment groups.

Question 11 Suppose that researchers design and implement an RCT. In the middle of the trial, they learn that local media have published commentaries and editorials advocating their program and its benefits. What part of the project would this have the largest effect on?

a. The cost of the project.
b. The internal validity of the project.
c. The external validity of the project.
d. The length of the project.

Question 12 What is the main drawback of a natural experiment, as compared to an RCT?

a. It costs vastly more.
b. It does not deliver causal estimates.
c. It does not deliver statistically significant estimates.
d. It is harder to verify randomization and internal validity.

Section 2: Short Answer

Question 1 This question asks you how family planning policies would change the steady state in a Solow model.

a. Draw the initial diagram.
b. Suppose that the family planning policies lowered the fertility rate. Which curve or curves will this shift?
c. Draw the change to the diagram.
d. How do family planning policies affect the steady state level of k? of y?

Question 2 You are asked to consider whether aid agencies should prioritize an expansion of budget support for health programs in poor countries. You know that the correlation between life expectancy and PPP GDP per capita is strongly positive across countries. Why is this evidence not enough? What sort of evidence would you find more persuasive?